You Have to Give YRC Points for Creative Thinking

Implications
YRC Worldwide, the nation's largest trucking company which has lost close to $2 billion over the last nine quarters, is applying for $1 billion in bailout funds under the government's Troubled Asset Relief Program (TARP).

YRC Chairman and CEO William Zollars says the funds are necessary "to get the conversation started" about the company's estimated $2 billion in pension obligations to various multi-employer pension plans, including the Teamsters' Central States plan. While YRC is not a financial institution and its odds of receiving the bailout are considered slim, Zollars says it's unfair for YRC to be paying billions of pension payments when roughly half its contributions are going to workers who never were employees of YRC companies.

Analysis

Creativity is a wonderful thing. It has given us modern art, rap music, the sport of Ultimate Fighting Championship and thousands of other off-the-mainstream elements of our society.

Now comes William D. Zollars, who wants to magically change the nation's largest trucking company into a financial institution.

Zollars is chairman and CEO of YRC Worldwide, the nation's largest trucker with $8.9 billion in revenue last year. YRC has about a 20 percent market share in the less-than-truckload (LTL) sector of the industry. It has lost $1.869 billion the last nine quarters, including a pre-tax loss of $415 million in the 2009 first quarter.

YRC has admitted its losses and high debt load may cause it to run aground of its bank covenants. Those agreements state that YRC's debt cannot exceed 3.5 times earnings before interest, taxes, depreciation and amortization (EBITA).

Zollars says he plans on applying for $1 billion in TARP funds because his company is obligated to pay an estimated $2 billion this year into various pension plans.

Like most unionized trucking companies, YRC belongs to various Teamsters' multi-employer pension plans. Because more than 600 Teamsters-covered trucking companies have gone bankrupt since deregulation in 1980, YRC is in the untenable position of being one of the last surviving contributors to these multi-employer plans.

In fact, Zollars tells the Wall Street Journal in this scoop, that nearly half of YRC's annual pension contributions are going to fund workers who never worked a day in their lives at companies controlled by YRC units.

That's unfair. Hence, Zollars says, YRC deserves the bailout.

Analysts, lawyers and others who have dealt with the government in applying for TARP funds say Zollars' quest is a longshot at best. I tend to agree. After all, YRC simply is not a bank, financial or lending institution.

I do agree with Zollars that it's unfair YRC is stuck with paying for pensions of workers who never worked for his company. But unfortunately, that's how multi-employer pension plans were designed to work.

Ask UPS. The nation's largest transportation company also belongs to many multi-employer pension plans. But it saw this liability coming years ago. As a result, UPS two years ago made a decision to exit the Teamsters' largest multi-employer plan, Central States, because of the "overhang" of this liability.

As a result, UPS made a one-time payment of $6.1 billion (about half that, after taxes) to Central States in exchange for getting out from underneath its obligations to that fund. UPS could do that because that $50 billion company is profitable--even in the worst freight environment in more than 30 years.

YRC could opt to do the same thing. I estimate its withdrawal liability to be perhaps as large as $3 billion--an impossibly high figure, given YRC's precarious financial condition.

With that option off the table, YRC evidently feels it has to try the next-best thing. That's TARP.

Prediction: This will be approved the day pigs fly and Dick Cheney applies to be a fund raiser for Barack Obama's re-election bid.

I don't really believe Zollars even thinks this will fly. But as he tells the Journal, it's a way "to get the dialogue started about the pension issue."

I give Zollars points for thinking outside the box. And if it works to shave YRC's pension obligations by a substantial amount and keeps his company afloat, it was worth it.

As the 50-to-1 winner of the Kentucky Derby proved a few weeks ago, longshots do come in. At least at the race track

UPS Looking at Bailout Impact

Extending TARP to trucking industry raises questions

Transportation giant UPS said it’s studying the issue of federal bailouts for financially ailing trucking companies but wouldn’t comment directly on competitor YRC Worldwide’s request for $1 billion in federal aid.

“The bottom line is, we don’t comment on the financial difficulties of our competitors,” said UPS spokesman Norman Black. On whether the treasury department program which has so far has sent money to the banking, automobile and insurance industries should be extended to the trucking industry, “we’re still looking at that,” Black said.

UPS paid $6.1 billion to unshackle itself from its own pension liability in 2007. Industry observers said at the time that allowing UPS to exit the pension plan, which covered 240,000 union parcel workers, was part of a quid pro quo with the Teamsters that gave the union an unhindered path toward organizing UPS Freight, the company’s less-than-truckload subsidiary, through a terminal-by-terminal card check agreement.

One Wall Street analyst wondered, “If YRC is allowed to get $1 billion from TARP, is UPS allowed to get a $5.1 billion refund?”

YRC wage cut will remain through 2009

A 10-percent wage cut for YRC Worldwide Inc.’s nonunion workforce will remain in effect through the remainder of the year.

The Overland Park-based trucking giant initially planned to reduce the salary cut to 5 percent in July. But economic conditions forced the company to keep the 10 percent reduction in place, said YRC chairman and chief executive Bill Zollars.
YRC Worldwide has about 1,200 area nonunion workers.

Also, the company reportedly will seek $1 billion in federal aid to help with the company’s obligations to the pension funds for union employees.

The company is starting to realize benefits from the merger of its two national carriers in March, Zollars said this week, but the economy has yet to respond. That has forced YRC Worldwide to maintain the current level of pay cuts as well as keep the company’s suspension of the 401(k) plan match.

“We just can’t predict what’s going to happen with the economy,” he said.
YRC’s drivers and dockworkers voted to accept a 10 percent wage cut for all of 2009. That agreement also eliminates cost-of-living increases and reduces future annual pay raises by 10 percent through the life of the contract, which expires in 2013.

While the wage structure with the union employees remains resolved, the pension is another matter. The Teamsters multi-employer pension plans have become underfunded as fewer carriers participate in the plans. United Parcel Service made a one-time payout to exit the plans last year, leaving YRC Worldwide as the biggest contributor. Full Story.......

YRC to Apply for Bailout Funds

Amid Pension Pressure, Trucking Company Plans to Request $1 Billion in U.S. Aid

YRC Worldwide Inc., one of the nation's largest trucking companies, will seek $1 billion in federal bailout money to help relieve pension obligations, the chief executive said Thursday.

The move comes as the trucking giant struggles to shore up its finances. The company's ability to weather the recession will have significant implications for the trucking industry and large customers across the country.

Chief Executive William Zollars said the company will seek the money to help cover the cost of its estimated $2 billion pension obligation over the next four years. Under a complicated system that Mr. Zollars labeled unfair, roughly half of YRC's contributions to a multi-employer union pension fund cover the costs of retirees who never worked for the Overland Park, Kan., company.

By applying to the U.S. Treasury for money under the Troubled Asset Relief Program, Mr. Zollars said he hopes to "get the conversation started" with federal authorities about reducing the company's pension obligations. He said YRC will submit an application to the Treasury Department as early as Friday.

Experts say the company's odds of actually getting TARP money appear to be slim. A Treasury spokesman didn't return a call seeking comment.

"My experience dealing with Treasury is that with TARP funds they are relatively narrow in how they view things," said Frank Bonaventure Jr., a lawyer who has represented banking clients seeking these funds. "They have not been very expansive in terms of how it is applied and what industries could get it."

The move comes at a time when YRC is taking steps to cut costs and raise cash. With $1.5 billion in revenue for its most recent quarter, YRC owns at least 20% of the national market share in the less-than-truckload industry, in which trucking companies combine multiple customers' loads into a single truck.

Last month, YRC reported a $415 million first-quarter loss, with a 30% drop in freight tonnage. Some customers fled amid fears about the company's financial health and its ability to smoothly merge its separate Yellow and Roadway brands. YRC has been working on the integration for several months.

The company recently negotiated a 10% wage cut for its 35,000 Teamster employees and requested to put up some of its property as collateral in order to defer three months' worth of payments to its pension plan. It also notified investors that it might violate the terms of its bank covenant, although Mr. Zollars said Thursday that YRC "continues to work closely with our bank group and would expect no issues around the second-quarter covenant."

One potential outcome that the company could seek is for the Pension Benefit Guaranty Corp. to take over financial responsibility for pension payments to retirees who worked not for YRC but for other companies that have since gone out of business and are no longer contributing to the multi-employer plan, according to a person familiar with the situation.

Mr. Zollars declined to comment on YRC's specific strategy in seeking the funds, other than to say the company shouldn't be forced to pay the pension benefits of employees who never worked for YRC.

"We're making really good progress on our financial-recovery plan and we think this is an extra burden we shouldn't have to be carrying," he said, adding that applying for the TARP funds is a "way to get the dialogue started about the pension issue."

As trucking goes, so goes the economy

Looking for signs of economic recovery? Try counting the number of trucks on the road.

Trucks carry almost all the manufactured and retail goods in the country - from refrigerators to lumber, detergents to toys. Many economists gauge how fast assembly lines are running, and how much consumers are buying, by the volume of goods hauled by trucks. But the most recent earnings reports show trucks are not carrying enough yet to indicate recovery is near.

Slow consumer spending and stalled manufacturing activity took its toll on truckers in the first three months of the year. Nearly all major trucking companies reported lower first-quarter revenue and falling profits as the recession continued and shipping demand slid. Many cut back their fleets because of soft demand. Werner Enterprises Inc., for example, said it trimmed an additional 4 percent of its fleet of over 8,000 trucks in the first quarter. Many companies said more cuts will come.

Full Story.......

How Much More Capacity Needs to Exit the Trucking Industry?

Implications

The persistent slump in U.S. industrial freight demand continues to take its toll on all modes of transportation carriers. Despite double-digit percent capacity coming out of various modes, there continues to be too many trucks chasing too little freight. When will the correct equilibrium arrive that will allow carriers to return to profitability?

Analysis

The slump in U.S. freight demand has reached 34 months, according to my charts. It's the longest slump since trucking was deregulated in 1980, and really shows no signs of a turnaround yet.

Begun in August of 2006, the slump continues as many carriers are reporting first-quarter losses as they continue to "feel for the bottom, " as one carrier executive said.

This is despite much capacity already exiting all modes of transportation.

An analysis by respected freight analyst John G. Larkin of Stifel Nicolaus, Baltimore, shows exactly how much short-term capacity has exited the market place, either voluntarily or through bankruptcies and closings of smaller carriers, mostly in the TL sector.

In TL, Larkin estimates that 18 percent of short-term capacity has left the market, with about 15 percent long-term reduction necessary. On LTL, the short-term figure is 8 percent, with 6 percent long-term needed. In rail and barge, 15 percent short-term capacity has left, but no long-term drop is needed, according to Larkin.

Express has lost 12 percent short-term capacity, with 8 percent long-term needed. Ocean has lost 11 percent, but needs no long-term reduction in capacity, Larkin says.

The anecdotal evidence supports Larkin's figures. There are more than 735 ocean vessels "parked" off the Singapore Coast because of double-digit drops in east-bound container freight from Asia. Ocean freight rates have collapsed, and may not recover for years. Chinese exports dropped 22.6 percent in April while in the Philippines, that level nose-dived nearly 31 percent from year-ago levels.

The American Trucking Associations' most recent for-hire Truck Tonnage Index shows a startling drop in March, usually a month when freight volumes tend to show an uptick. This year, ATA's index shows, March volumes fell 12.2 percent compared to year-ago figures. That is its lowest level since March 2002.

Rail freight volumes were off 22 percent in March. Overall intermodal freight levels dropped 16.4 percent, although domestic intermodal growth was up 4.4 percent in that period.

Air freight demand has evaporated, hurting the fortunes of both FedEx Corp. and UPS, despite the exit of rival DHL from the U.S. domestic market place. Shippers who formerly demanded next-day air freight services are discovering that second- and third-day ground services are serving their needs just fine, thank you.

The wonder actually is that losses have not been worse in transportation. Except for troubled U.S. trucking giant YRC Worldwide, where losses are approaching $1.9 billion over the last two-plus years, other carriers' losses have been rather mild.

Of course, most of the rest of the trucking industry is quietly hoping YRC's lenders get tough and perhaps cause a bankruptcy proceeding. At $9.4 billion, YRC has nearly a 27 percent market share in the LTL sector. Ironically, that may just be about the correct amount of overcapacity in that sector.

YRC Warns of Financial Violation

Trucker may miss lender’s earnings requirement

YRC Worldwide warned it may not reach its second quarter earnings requirement as the fragile financial standing at the nation’s largest heavy-freight trucking company seems to be getting shakier.

YRC’s lenders placed strict targets on its quarterly earnings (before accounting for interest and taxes) in 2009, with a second quarter earnings requirement of $45 million.

In a May 11 filing with the Securities and Exchange Commission, however, YRC said there was “substantial risk” that recent cost reductions and shipment increases at the company would not be enough to meet that target. YRC is negotiating with its bank group to amend its credit agreement before the second quarter ends June 30.

YRC’s operating revenue was down 33 percent in the first quarter compared with the prior year and the company lost $257 million. Regional tonnage was down 28 percent; national tonnage fell 30 percent.

One Wall Street analyst is not optimistic about YRC’s recovery chances in the thick of a recession.

“We have a difficult time seeing how the math works here to restore the company to profitability,” said David Ross of Stifel Nicolaus. “It has already had its employees take a 10 percent wage cut. Plus, we do not see industry volumes rebounding this year, and industry pricing remains very competitive.”

Employers told to prepare for Free Choice law

As union leaders press for passage of the federal Employee Free Choice Act (EFCA), business leaders are opposing the change while positioning themselves to head off the perceived increased likelihood of unionization if the measure becomes law.

Labor leaders recently organized a demonstration by dozens of workers outside the Commerce Building in South Bend while inside the Chamber of Commerce, lawyers gave a workshop on the act to more than 30 business leaders.

A similar bill failed in 2007, but both labor and employers believe that a new administration and changes in the composition of the Senate increase the likelihood that some version will become law.

Major provisions of the bill would:

Allow unions to organize with a “card check” system, replacing the common secret ballot approach. A union would form when a majority of workers sign a legal document, similar to a power of attorney, indicating they want the union.

Set time limits on the process of contract negotiations that could trigger federal mediation or binding arbitration if the management and union cannot reach agreement on items in the contract.

Significantly increase the penalties on companies that violate the National Labor Relations Act.

Much of the national attention on the proposal focuses on the elimination of secret-ballot votes for forming unions – in conversation, business leaders refer to EFCA as “the card check legislation.”

Full Story.....